Equities and Indexes - PowerPoint PPT Presentation

Equities and Indexes

Common Stock

Preferred Stock

Equity Index

Bond Index

• Definition
• Ownership shares in public companies
• Characteristics
• Voting rights
• Shareholder can vote for company issues, e.g., executive compensation, board of directors, auditing firm, etc.
• Residual Claims
• Last in line of all claimants on the company, e.g., owns whatever is left after workers, suppliers, bondholders are paid off.
• Limited Liability
• Lose no more than original investment, e.g., you pay $90 for a share of IBM, you’ll lose no more than that.

• A quote from WSJ (or YAHOO these days)
• A few questions
• How much do you have to pay for a share at close?
• What is last year’s earning?
• Is the stock boring?

52 Weeks

Hi Lo

Net

Chg

Close

Hi

Lo

Stock (SYM)

DIV

YLD%

PE

Volume

GenElec (GE)

1.24

4.41

13.07

28.10

-0.73

42.15

25.60

28.88

28.08

47087660

$0.31/Quarter

• Definition
• Non-voting share in a corporation
• Characteristics
• Fixed dividend stream (like bond coupon)
• Dividend may be skipped yet cumulative
• Dividend fully taxable
• How different is it from a bond?

• What are they?
• An indicator of average security prices
• Why do we need them?
• Tracking market returns
• Benchmarking fund manager performance
• Bases for derivatives, e.g., index options
• Factors affecting an index
• Representative?
• Weighting of components?

• DJIA
• S&P 500, S&P Mid Cap.
• NASDAQ 100
• Nikkei 225 (Tokyo Stock Exchange)
• FTSE 100 (London)
• Wilshire 5000
• MSCI-EAFE Index
• Morgan Stanley Capital International Europe, Australia, Far East Index (including 21 developed countries outside North America)

• Some facts
• 30 industrial stock price-weighted average.
• Oldest and best-known in the U.S.
• Used to representing about a quarter of the market value of the NYSE stocks.
• Quantitatively
• Divisor changes when stock splits or stock is replaced by another

• Construction
• Suppose DJIA has two stocks

Divisor

• What happens when a stock splits?
• At market close today, B has a 2-for-1 split
• Where does the new divisor come from?

Divisor

• Including 500 NYSE, Amex, NASDAQ stocks
• Considered to be a much broader index of the U.S. market than the DJIA
• Numerous financial products derived from the index
• Mutual funds indexed to the S&P 500 Index
• S&P Depository Receipts (SPDR)
• S&P 500 Index Options and Futures
• Market value-weighted index – larger companies have more weight in S&P 500
• S&P 500 is float-adjusted since Sep 16, 2005

AMZN joins S&P 500 on Nov 18, 2005

Announcement is made after market closing on Nov 14, 2005

• Market value-weighted index - Calculation

• When does the divisor change?
• NOT for stock split
• YES for stock replacement in the index
• E.g., C replaces B in the index

Divisor

• Equally Weighted Stock Indexes

Equally weighted stock indices place equal weight on each stock return, and call for a portfolio strategy that places equal dollar values in each stock.

E.g., Stock A has a return of 2% and stock B has a return of 1%. An equally weighted index of A and B has a return of

0.5*2% + 0.5*1% = 1.5%

• Constant portfolio rebalancing is required to track such an index

• An indicator for bond market returns

• What are stocks and preferred stocks?
• What are stock indexes for?
• What are commonly used indexes?
• DJIA: price-weighted - Old and Faithful
• S&P: float value weighted - good “market” proxy
• NASDAQ: new and dynamic
• Less followed
• Bond indexes: professionals pay more attention to it